Federal Budget 2019 - Superannuation

Do you want the Federal Government to make it harder for your take-home pay to increase over the next six years?

No? It’s going to happen anyway.

According to economists at the Grattan Institute, that’s what will happen when the compulsory superannuation rate is increased from 9.5 per cent to 12 per cent. You won’t be able to avoid it because the Coalition and Labor want it to happen.

Sounds bizarre? Let’s unpack it.

Australia’s employers are required to make regular contributions to their employees’ super accounts. The size of their contribution has to be 9.5 per cent of an employee’s earnings.

But from July 1, 2021, that 9.5 per cent rate will increase in increments until it reaches 12 per cent on July 1, 2025.

Where will that extra money come from? It won’t come out of employers’ pockets. It will come from foregone wages.

Since the early 1990s, when the compulsory superannuation regime was established, it has been a design feature of the system for any increases in the compulsory super rate to come at the expense of wages.

Whenever the compulsory super rate has been lifted, future take-home wages have been lower than they otherwise would have been.

The Henry Tax Review and the Parliamentary Budget Office have shown that’s precisely what happens.

And the Grattan Institute releases a paper today explaining what impact it will have on workers’ wages when the rate is lifted to 12 per cent by mid-2025.

“By the time it’s fully implemented in 2025-26, a 12 per cent Super Guarantee will strip up to $20 billion from workers’ wages each year, or nearly one per cent of gross domestic product,” the report says.

That’s $20 billion in “foregone wages” — wages that would otherwise be in workers’ pockets.

The Grattan Institute argues it’s bad policy to impose a higher compulsory rate on workers when their wages are growing at anaemic rates already.

At a time when consumption growth is poor, how will stifling wages growth spur consumption? It will depress consumption further.

“Stagnant wages are a big issue in the Federal election campaign. So it’s strange that both major parties remain committed to changes that will take more out of workers’ pockets,” the report says.

“Both sides of politics are committed to wage cuts that workers can’t afford, in exchange for extra super that won’t help much.”

The Grattan Institute reminds people that the age pension is indexed to wages, so as the lift in the super rate inevitably suppresses wages growth, pensions will grow by less, too.

And it argues that increasing compulsory super will primarily boost the retirement incomes of the top 20 per cent of taxpayers who have access to extra super tax breaks, which will cost the Budget over $2 billion a year.

“More super doesn’t even save the Budget money for a very long time: super tax breaks will exceed any decline in pension spending until at least 2060,” the report says.

It concludes: “On super, both Labor and the Coalition should think again.”

It’s important to remember that the Grattan Institute has skin in this game intellectually.

It’s been opposed to lifting the super rate for a long time. It has argued that under current settings, when the system reaches maturity, Australians will be retiring with more than enough to live on.

It believes many people will even receive an increase in their income when they retire and begin drawing on their super because the system’s tax treatment is so generous.

Those views are controversial.

But the argument it’s making today about the irrationality of pursuing a 2.5 point increase in the compulsory rate during a period of slow wages and consumption growth is a good one.

If the compulsory rate must increase, why can’t it wait until wages are growing more strongly? Why does it have to be pursued regardless of economic conditions?

The obvious rebuttal to that question will be that politicians have delayed the decision to increase the super rate for too many years already.